Sebi Weighs 2% Entry Load to Revive MFs

Capital market regulator Sebi, at its board meeting on August 16, will consider the reintroduction of a 2% entry load for mutual funds sold beyond the top 15 cities, and giving fund houses greater flexibility in managing their total expense ratio . As part of long-term measures, the regulator could also discuss with the government options like tax breaks to investors, said a person familiar with the development. 

The Sebi board is likely to request the Mutual Fund Advisory Committee to develop a policy paper on mutual funds after consulting all stakeholders. "The paper is expected to deal with the policy objectives, measures to augment the financial inclusion objectives by increasing penetration of the industry, obligation on the industry and other stakeholders, tax and other measures to help growth of the industry," said the person. 
The MF industry is faced with steady outflows, partly due to disinterested distributors, since 2009 when former Sebi chief CB Bhave banned the entry load charged up front to primarily meet expenses on distributor commission. (Of every . 100 an investor used to put in, . 2.25 was charged as entry load while . 97.75 went into stock purchase. Of this, the chunk was earmarked for distributor commission. Currently, only the expense ratio is charged by a fund house as a fee to manage and operate the fund, and is recovered over a period of time). 
While the industry is now lobbying for bringing back entry loads, the advisory panel has proposed a norm where the entry load charged to a scheme is clawed back and credited to the scheme by fund houses in cases where investments from smaller cities are redeemed within a year. 
A 13-member advisory committee under the chairmanship of Janki Ballabh, in its report submitted early this month, has suggested a separate tax incentive of . 50,000 a year for equity and debt schemes with a oneyear lock-in. 
"Schemes similar to 401(k) plans in the US may be considered in mutual funds to attract long-term money," the committee said in its report. Besides entry load, it has been proposed that the industry should be allowed to exclude service tax from expenses of schemes. Till last year, the tax was recovered from brokers. But after the last Budget exempted brokers from service tax, fund houses have asked for a new rule where they can pass on the tax to investors. It has also been proposed that the management fee charged to schemes should be adequately disclosed by AMCs. 
The Sebi board is also likely to fix a fee that debt schemes — currently exempted from paying brokerage for securities bought or sold — will have to pay. This could be 12 basis points for cash market transactions and 5 basis points for future & option deals. 
But industry experts are unsure of the impact of re-introduction of entry load beyond the top 15 cities. Exposure Curbs for Debt Schemes Likely 
"It would be a half-hearted measure. There is hardly any inflow from smaller cities," said a member of the 13- member panel on condition of anonymity. 
Top 15 cities contribute 87% of total assets under management (AUM), with Mumbai, Delhi, Bangalore, Kolkata and Chennai accounting for 74% of the total AUM as of June 2012. 
The market regulator is also planning to restrict debt schemes' exposure to an individual sector. As per the proposal, total exposure of a debt scheme may be restricted to 30% of the net assets in a particular sector, excluding investment avenues like bank corporate deposit, government bonds and securities issued by triple-A rated public financial institutions. 
Distributors who nudge clients to needlessly churn portfolios may find themselves under Sebi's glare. "If a distributor is found to be engaged in excessive churning, asset management companies may be advised to do additional due diligence on such distributors." Indeed, Bhave had put an end to entry loads due to random portfolio churning that distributors pushed for to rake in more commission income. 
arun.kumar17@timesgroup.com